Hey Trader,
Over the last six weeks, oil went from the DJ headlining the Volatility Rave Party to the bouncer at the door trying to get the last people out of the club.
This seven-day short squeeze rally is coming to an end.
As I so eloquently pointed out to the OP traders in Slack, "It seems like everyone who puked their long volatility hedges seems to be only dry heaving right now."
We are entering the rotation phase of the market cycle, and Licia Leslie is someone you need to follow very closely over the next couple of weeks.
Below I'll map out the four phases that show you what’s happened to the market, and why you don’t want to miss Licia’s free class Thursday and Friday.
Phase 1: The One-Factor Market
When the Strait of Hormuz closed, oil became the only force in the universe.
Everything orbited crude – Stocks, bonds, gold, the dollar, all of it moved in lockstep based on one variable.
The only safe trades were cash (DXY), volatility hedges (VIX), and energy stocks (XLE). Nobody bought crude oil because they wanted to. A one-factor market. One thing driving every asset on earth.
Phase 2: The Correlation Cracked
Assets that had been moving in lockstep started to separate.
Stocks stopped tracking oil tick for tick. Gold started diverging from crude on intraday moves. The gravitational pull of oil was weakening.
Not because oil stopped mattering… Because the market started pricing in a resolution.
Phase 3: The Short Squeeze
The ceasefire announcement was the catalyst.
The VIX curve flipped from backwardation (crisis) to contango (normal). The unknown became known.
And the squeeze hit.
Everything that had been sold got bought. Everything that had been hedged got unwound.
It was violent, fast, and broad.
The VIX yawned at the blockade because the system had already shifted. Crisis pricing was over.
Phase 4: Where We Are Now
Today something changed again.
Most of the time, the VIX and stocks move in opposite directions.
Stocks up, VIX down.
Today, stocks rallied but the VIX stopped going lower, and the futures actually ticked up. That is a subtle but important signal.
At the same time, we saw real sector rotation for the first time in weeks.
Tech, financials, retail, and consumer discretionary were up. Homebuilders, materials, staples, and industrials were down. The market is no longer buying everything.
It is choosing.
That is the phase shift. The broad squeeze is exhausting.
Rotation is the new game.
The Two Forces That Determine What Rotates Where
Crude oil and the 10-year yield. Those are the only two variables that matter for what comes next.
Negotiations are not over. There is no deal. Crude is not going back to pre-war levels without a concrete agreement on what happens with the Strait. With crude at this level, the 10-year yield at 4.35 percent is not coming down. Higher oil is going to bleed into the inflation data. Persistent inflation expectations mean the Fed stays on hold. The Fed on hold means the long end of the curve stays sticky.
Which sectors win depends on how fast those two move. The incoming economic data and the pace of Iran negotiations will determine that.
How to Play It
This is exactly the environment where Licia Leslie thrives. Rotational, choppy, two-way movement in individual names. She recently bought iShares Expanded Tech-Software Sector ETF (IGV) puts and Intel (INTC) calls and crushed both sides.
That is the skill set this market rewards right now.
She is running a free class Thursday and Friday on exactly how to trade this kind of environment.
If you want to see how a professional navigates rotation in real time, that is where to be.
Enjoy the process,
Tim